Innovation and collaboration under the MER Strategy: changed days for operators and the supply chain?

THE regulatory framework represents a huge shift for oil companies — and the industry as a whole — in terms of the way it works, as well as its mindset.

And, there’s no doubt innovation and collaboration are two things we need even more of in the North Sea. Here, we take a look at the MER regime, how it works in practice, and how it’s enforced.

In March 2016, the government issued the MER Strategy, a highly important regulation of some 34 paragraphs setting out the new maximising economic recovery (MER) obligations announced as part of the 2014 Wood Review.

Paragraphs 18, 19 and 28 speak to key requirements to use new technology and to collaborate.

More broadly, paragraph seven sets out the central obligation: “Relevant persons must .... take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters.”

However, four safeguards qualify this obligation —

  • a MER duty must never Involve illegality
  • a MER duty must not require a company to invest in circumstances where the investment will not bring a “satisfactory expected commercial return” (SECR)
  • A party investing to comply with MER has a right to a contribution from a third party beneficiary
  • A MER obligation must never lead to a situation in which benefits to the UK are outweighed by damage to the confidence of oil and gas investors

Relevant persons

So, who are the “relevant persons (MER parties)” who must comply?

The answer, found in the amended Petroleum Act Section 9A(1)(b) are

  • licensees
  • licence operators
  • owners of upstream petroleum infrastructure, and relevant offshore installations
  • persons planning and carrying out the commissioning of upstream petroleum infrastructure

This means every UKCS licensee — whether operator or non-operator — is caught by MER, as are the new independent offshore infrastructure owners.

While a few oil service companies may be caught in their capacities as operators or owners of offshore infrastructure, supply chain companies are overwhelmingly exempt.

Who calls the shots?

Another key question is who is the final decision-maker on whether a MER Party is complying with the MER strategy?

The answer is the UK courts with the caveat that the Oil and Gas Authority (OGA) may seek to sanction a MER party for failing to comply using the administrative procedures created in the Energy Act 2016.

Even here, however, there is ultimate appeal to a UK court.

What about new technology?

So, what about the specific duty to use new technology?

In deciding whether to use new technology, a MER party must balance the interests of the UK as a whole and not merely its corporate interests.

While the supply chain may not be directly obligated to deploy new technology as required by paragraphs 18 and 19, the operators are required to observe these obligations in their project development and operations.

And what of collaboration?

The duty to collaborate with the supply chain goes hand in hand with the obligation to use new technology.

Here’s why.

The strategy says parties should: “.. consider whether collaboration or co-operation with other ..[MER Parties] .. and ..[ the supply chain]... could reduce costs, increase recovery of economically recoverable petroleum or otherwise affect their [MER] compliance.”

We do not read the word “consider” as referring to a box-ticking obligation.

It is clear this duty to collaborate applies to relationships with other MER Parties, including potential deal-making and to contractual relationships with the supply chain, as well as with the OGA.

Best interests

The MER Strategy nowhere defines what it means by collaboration, but it would seem to mean something beyond the behaviour that would merely be in a private party’s best interest in any case, with the reference to “economically recoverable petroleum” assuredly referring to petroleum recovery across the UK Continental Shelf.

The OGA has highlighted collaboration is its 2016 Asset Stewardship Expectations publication.

There, the collaboration expectation is that licensees should “build effective business relationships which aim to create more value than is possible alone, by embracing a culture of collaboration.”

More recently, the OGA has issued a detailed guidance note. Using rather intricate criteria, operators are being examined by the body for the extent of their collaborative culture. Thus, the OGA is taking collaboration very seriously, as would be expected given the observations of the Wood Review on perceived lack of it in the North Sea.

So, what does this mean for the industry?

Make no mistake, the MER strategy’s legal requirement for oil companies to innovate and collaborate in order to maximise economic recovery is a game-changer.

Paragraph 28 imposes a legal obligation on oil companies to collaborate with the OGA, with other oil companies and with the supply chain.

However, the supply chain does not owe a reciprocal legal duty to collaborate.

Beyond hard legal obligations, collaboration in the oil industry is becoming a watchword and an expectation. All commercial parties in the oil industry need to consider their own strategies in this regard.

The Wood Review puts much store in the desired use of innovative new technology. The MER Strategy codifies this.

How the OGA enforces these new rules will be key.

Will oil companies collaborate and innovate in circumstances where their benefit in doing so is speculative or uncertain? How will they value the collective good as required by MER? The bottom line is that there is no doubt that we need more innovation and collaboration in the North Sea.

To find out more about collaboration, how it works best in practice and what processes need to be implemented, join us at our free “keys to collaboration” event on Thursday, February 22 in Aberdeen.